The Corporate Strategies of 02 Plc - Case Study Example

The Corporate Strategies of 02 Plc in Harvard Style I. Executive Summary O2 Plc is the largest mobile service provider in UK in terms of number of subscriber. Though the company leads in the UK market, it lags behind its competitors including Vodafone, T-Mobile, Orange, and 3 in terms of financial performance. The company capitalizes on its capability to offer add-on services and features through its strategic alliances and innovativeness. Utilizing Porter’s generic strategies model, O2 is seen to employ a differentiation strategy. This strategy is very much conducive in the current business environment. However, this report highlights that O2 focus on understanding and responding to external opportunities and threats while also enhancing its financial performance. II. Introduction to the Company With its vision of enabling its customers to make the most of their world and possibilities though the services it offers, O2 plc (O2) accomplishes its commitment of providing mobile communication services in Europe. The business organisation also profits from its leading mobile internet portal business. Armed with its values of being bold, trusted, open, and clear, O2 continues its quest to become the telecommunication industry’s market leader. The creation of O2 in the 1990s can be traced backed to the decision of British Telecommunication to “demerge its mobile phone business” in order to strengthen the financial position of the latter. From its beginning, the firm is currently a major player in the various nations where it operates including the United Kingdom, Republic of Ireland, Germany, the Isle of Man, and Asia. As the business organisation is focused on satisfying consumer needs, O2 strategic business units are classified according to their geographic locations. It should be noted that the products being offered varies in each region (O2 Plc 2006). The major products of O2 are mobile telecommunication equipments which are either paid through installment plans or pre-paid. With its thrust to provide the market with higher quality products, the company offers complementary services like third generation telephony (3G), O2 Active, I Mode, and O2 Online. O2 also ensures the satisfaction of customers by offering product features like entertainment through its sponsorship of the England Rugby Team and Arsenal FC and partnership with Anschutz Entertainment Group (O2 Plc 2006). III. Competitive Position in the Industry Environment As stated above, O2 Plc operates in different geographic locations, battling head-on with various competitors. Table 1 shows the geographical locations of firm’s business activities alongside with its competitors in each region. It can be deduced that O2’s direct competitors are Orange SA (Orange), T-Mobile, 3, Vodafone Group Plc (Vodafone), Virgin Mobile Ltd. (Virgin Mobile), Meteor Mobile Communications Limited (Meteor), and e-plus. Table 1. Geographical Location of O2 and its Main Competitors Geographical Region Major Competitors United Kingdom Orange, T-Mobile, 3, Vodafone Ireland Vodafone, Meteor, 3 Germany T-Mobile, Vodafone, e-plus Czech Republic T-Mobile, Vodafone Slovakia T-Mobile, Orange In order to look at the relative position of O2 Plc relative to its competitors in the United Kingdom, this report will look each business organisation in terms of market scope, number of customers, financial performance, market growth, products and services sold, and factors affecting business well-being. The main findings including the data for O2 are tabulated in Table 2. Among all the players in the global mobile communication industry, Vodafone holds the largest market share at 26.8%. The business organization is recognized as the largest mobile telecommunication company in the world with a market value of £65 billion (Vodafone 2006). It is estimated that the market leader approximately has 186.8 million subscribers in the 27 countries where it conducts its business activities. Though Vodafone leads the industry in terms of generating service revenue, the mobile service provider incurs losses during the fiscal year 2005 due to the impairment charges in its acquisition of Mannesmann and its discontinued business in Japan (Vodafone 2006). Table 2. Competitor Benchmarking1 Industry Players Scope Customer Base Revenue (2005) Profit (2005) Net Profit Margin Market Share Orange international (Europe and Caribbean) 90 million £49,038 million £6,360 million 12.96% 23.3% T-Mobile international (Europe and United States) 99 million €59,604 million €6,016 million 10.18% 23.5% 3 international (Asia Pacific and Europe) 13.5 million US$31,008 million US$1,839 million 5.93% 5.1% Vodafone international (Europe, Asia, Americas, Middle East, Africa) 186.8 million £34,133 million -£7,540 million -22.09% 22.8% O2 Plc international (Europe and Asia) 27.4 million £6,683 million £301 million 4.50% 25.3% T-Mobile follows far behind Vodafone with 99 million subscribers and €59,604 million turnover in 2005. The company has significant presence both in Europe and United States, obtaining much of its revenue in its home country Germany where it is regarded as the largest mobile phone operator. It also holds a strong foothold in the United States where it is the fourth largest wireless carrier. Financially, T-Mobile is able to convert more than 10% of its turnover into net profit (T-Mobile 2006). Orange closely follows T-Mobile with 90 million subscribers. Orange holds the largest market share in France where it is headquartered. It should also be noted that in terms of financial profitability, Orange appears superlative with 12.96 net profit margins in 2005. 3 is a Hong-Kong based mobile service provider offering its products in Asia and Europe (3G 2006). This company capitalizes in the introduction of new products and product features in the market where it operates. It is notable that O2 Plc is competing with multinational companies which operate in different parts of the globe. In terms of market scope, Vodafone appears to be the largest competitor of O2 as it is a constant leader in most of the geographic markets worldwide. Even though each player competes aggressively in the UK mobile phone service, O2 captures the largest market share at 25.3%. This huge market share indicates the company’s more efficiency in retaining clients and attracting new customers. It is also apparent that the four providers with the exemption of 3 capture almost the same size of market share. This indicates the intense rivalry among the players in the sector. In terms of financial performance, Orange appears to be the most profitable in 2006 in terms of net profit margin at 12.96%. O2 Plc is among the worst following Vodafone with a meager net profit margin of 4.50 %. It is understood that operating in UK’s mobile sector is very much capital intensive requiring massive amount to cover the investment in fixed assets. However, the relatively low net profit margin recorded by O2 Plc indicates its incapability of efficiently managing its operational costs. In fact, looking deeper, O2 is even worse than Vodafone even though the latter reports negative income. Vodafone is operationally more profitable than O2 (Vodafone 2006). In summary, O2 Plc strongly manages to offer more customer value than its competitors evidenced by the strong patronage shown by clients. The company’s marketing mix is working far more efficient than other business organizations. However, O2 is also faced with the challenge of allocating and managing its costs to enhance its financial position. It should be kept in mind that as the market leader in the UK market, O2 needs to keep up with the evolving hypercompetitive environment. IV. Strategic Direction and Methods of Development In its website, O2 communicates its objective of creating value for its parent company Telefŏnica SA by its unique strategy comprised of: “becoming the fastest growing major European mobile operator in revenue and profitability;” “delivering on customer promises; “improving customer experience,” “maximizing partnerships,” and taking advantage of growth opportunities (O2 Plc 2006). This section will briefly outline the strategy employed by O2 Plc and will thoroughly analyse this by employing Porter’s generic strategies model. In order to fully assess the success of O2 in achieving its objective as well as unveil the prospects which O2 should tailor its strategy into, this section will end with the company’s Five Forces and SWOT analysis. The strategy of O2 Plc can be summed up as follows: average/industry pricing; innovative handsets; technological advancement; strategic partnerships; add-on services; more product features; and continuous enhancement of customer value. In terms of pricing, O2’s charges are at par with the industry. The company continues its quest of harnessing technological advancement to bring more innovative handsets in the market like 3G phones. The mobile service provider also banks with its strategic alliances with various business organizations like Auschutz Entertainment Group to provide add-on services like music and entertainment. With these add-on services, O2 is able to create an identity of earnestly adding more product features in order to enhance customer value. It should be noted the business organisation continuously experience escalating level of customer satisfaction. Porter’s Generic Strategies According to Porter, companies can stick to three best strategies—cost leadership, market segmentation, and differentiation. Generic strategies are highly commended because they identify a certain area that a company can focus instead of trying to be “everything.” These definite winning strategies help business organizations to market scope and their competency (Thomson 2004). Analysing the business strategy of O2 Plc using this model reveals that the firm is utilizing a differentiation or more-for-more strategy. Accordingly, a differentiation strategy is used by a firm which capitalizes on its capability making its product uniquely appealing for a broad market. It is stated above that O2 Plc is banking on its partnership with other business organizations to add more features to its services which can differentiate it from the offerings of its competitors. O2 efficiently taps other services which can be used to enhance customer value like music and entertainment. This differentiation strategy can also be seen on how O2 makes innovative handsets which are complementary to its services. In order to further highlight the quality of its products and services, O2 charge higher than industry average prices. This mark-up is seen to cover to the added feature and quality not offered by competitors. Porter’s Five Forces Model Intensity of Rivalry: The market shares of the competitors in the mobile phone service industry indicate a high level of rivalry among the participants. The competitors’ aggressive strategies in pricing and product features further highlight the competition. Barriers to Entry and Exit: The mobile phone service industry is largely capital intensive and requires a high level of capital outlay. This also means that a potential entrant needs to be equipped with enough cash and aggressive marketing strategy to battle with established players. Both barriers to entry and exit are very high. Supplier Power: Supplier power is low as most of the players in the industry have their own facilities in transmitting voice and data signals. In fact, mobile phone service providers have higher leverage than their suppliers. Buyer Power: The evolution of the global business arena into a hypercompetitive environment highlights the buying power of customers. Customers are now more informed of competing product offerings through the advancement of technology. It should also be noted that companies are increasingly becoming market-driven and customer oriented. Threat of Substitutes: In the case of O2 Plc, threat of substitutes is moderate as it is able to differentiate its products among other mobile service providers. However, it indirectly competes with technologies like VoIP and PC calling. SWOT Analysis Strengths. O2 Plc enjoys strong brand equity due to its high share in the UK market. This gives the company high leverage both in its suppliers and the UK economy. It should also be noted that the business organisation has a very efficient marketing mix which helps it in retaining clients and attracting new customers. Weaknesses. As discussed above, O2 Plc suffers from financial inefficiencies. Relative to its competitors, the company is less capable of managing costs and expenses. It should also be noted that O2’s operation in other countries lags behind its performance in the UK market. Opportunities. O2 Plc can take advantage of the opportunities presented by the advancement of technology. The development of 3G and the possible proliferation of 4G give O2 and other industry players opportunity to develop more products and services as well as target more sectors. The evolution of a more hypercompetitive business environment can push its mobile service provider to be more efficient. Threats. O2 Plc is faced with the threats of a declining market growth and possible health risks associated with mobile phone use. The industry also battles with internet phone calls which can possibly pressure the providers to lower their costs. Market saturation also threatens O2 Plc making it more difficult to create revenue through voice calls and may result to price war. V. Conclusions and Recommendations O2 Plc’s move of harnessing technological advancements and strategic partnerships for its strategy is essential in coping with the developments in its external environment. This report stresses that O2’s the right track as it efficiently uses its strengths in order to take advantage of its opportunities. In the mobile phone service industry, innovation is very crucial especially because of the rapid technological revolution which makes product obsolescence very short. One of the key success factors in the sector where O2 operates is a player’s ability to differentiate itself from the competitors. It can be seen that O2 effectively does this by incorporating product features which it perceives to be important to customers. O2’s market leadership in the UK market further highlights the company’s ability to understand and respond to its target market. In order to retain its market share in the UK market, this report recommends that O2 Plc looks at it cost management. The company should strive to enhance its operational efficiency in order to boost its profitability. This will make it relatively easier for O2 to secure financing for its projects as well as maintain its brand equity. Failure to do so presents a formidable threat to the business organisation. The company should continue its strategy of differentiating itself from its competitors through new features and add-on services. However, O2 should also look into a way of making its operation more efficient and less costly. The company should strive to lower its costs in order to effectively respond to the possibility of more competitive pricing in the future. Lastly, O2 Plc should look at its operation in other countries. The company should strive to understand foreign markets and provide their unique needs. Also, O2 can take advantage of operating in more economies where demand for mobile services high and still increasing. References 3 Telecommunications, Retrieved 20 November 2006 from http://en.wikipedia.org/wiki/3_(telecommunications) O2 Plc 2006, Retrieved 20 November 2006 from http://www.o2.com Orange Plc 2006, Retrieved 20 November 2006 from http://en.wikipedia.org/wiki/Orange_SA T-Mobile 2006, Retrieved 20 November 2006 from http://en.wikipedia.org/wiki/T- Mobile Thompson, A. Jr. & Strickland, A.J. 2002, Strategic Management. 3rd ed. New York Mc Graw-Hill. Vodafone 2006, Retrieved 20 November 2006 from http://en.wikipedia.org/wiki/Vodafone Read More